A Simple Guide to Form 1125-A (Cost of Goods Sold).
A simple, step by step walkthrough of the IRS Form 1125-A.
We discuss the difference between COGM and COGS, and show you how to calculate both important manufacturing metrics.
Are you confused about the difference between Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM)? Don’t worry, you’re not alone!
Understanding the differences between these two similar-but-not-identical terms can be tricky, however it’s a vital part of any manufacturing business’ inventory management strategy.
That’s why we’ve broken it down for you so that you can gain a better understanding of COGM vs. COGS. Read on to discover what makes them unique and how you can calculate and use these metrics to better understand your business.
Try Craftybase - the inventory and manufacturing solution for DTC sellers. Track raw materials and product stock levels (in real time!), COGS, shop floor assignment and much more.
It's your new production central.
Let’s begin with COGS. COGS is short for “Cost of Goods Sold” and is a key metric for any business that manufactures or sells physical products.
So what is your Cost of Goods Sold? Your COGS include all direct costs of producing the goods that have been sold to your customers. Cost of goods sold is also commonly referred to as “cost of sales.”
COGS typically includes the cost of all the direct materials and external labor directly used to create the product that was sold.
It’s important to note that COGS usually excludes indirect (overhead) expenses. These are things like advertising or rent of warehouses and equipment.
Learn more: How to Calculate your Cost of Goods Sold (COGS) →
Another acronym often used in manufacturing circles is “COGM”. So, what is COGM and how does it differ to COGS?
The cost of goods manufactured (COGM) is a figure that represents the total cost of producing your finished goods. This includes the cost of raw materials, labor, and overhead expenses.
In contrast, the cost of goods sold (COGS) only includes the cost of raw materials and (in some cases) labor. It does not include overhead costs.
COGM is often used as a measure of profitability because it provides a more accurate picture of the true costs associated with production.
However, it is important to keep in mind that COGM can also fluctuate from period to period, depending on the mix of products being manufactured. As a result, COGM should not be used in isolation when making decisions about pricing or production levels.
The formula for calculating your COGM is:
Value of opening work in progress
As you can see, COGS and COGM are calculated differently and have different usages.
COGM is mainly used to calculate the overall cost of producing a good or service before it is sold, while COGS captures only the cost of goods that have been sold or provided to customers.
COGM is good for analyzing your internal manufacturing processes and supply chains, whereas COGS is more beneficial in reporting your internal manufacturing expenses against your revenue.
Determining the right price for your product can be a tricky balance. You want to ensure that you’re making a profit, but you also don’t want to price yourself out of the market. One way to help strike this balance is to use your cost of goods sold (COGS) as a guide.
As we’ve discussed, COGS includes all the direct costs associated with producing your product, such as materials, labor, and shipping. By knowing your COGS, you can get a good sense of how much it costs you to produce each unit of your product.
From here, you can add on a markup that will cover your other expenses and generate a profit.
Of course, there are other factors to consider when pricing your product, but using COGS as a starting point can help you make sure that your prices are both fair and profitable.
See also: Pricing Psychology for Success »
Makers have a few different options regarding software that can help them track their COGS. One option is to use a spreadsheet, such as Microsoft Excel or Google Sheets. This method can be simple and straightforward, but it requires a LOT of manual data entry.
If your costs change for one or more of your materials, then you’ll need to recalculate pretty much everything all over again - which can be quite a time sink.
Another option is to use dedicated COGS tracking software, such as Craftybase. These programs automate much of the data entry process and generally offer more features than a spreadsheet, such as the ability to automatically track inventory levels, generate real time pricing guidance and generate reports.
Ultimately, the best option for tracking COGS will depend on the needs of the individual seller however it is important to choose a solution that will grow with your business.
Craftybase is a cloud-based COGS software solution that helps small manufacturers track their costs, calculate their COGS, and price their products for true profitability.
With Craftybase, you can easily add your materials, labor, and overhead costs, then see how these costs impact your COGS and final product price.
With Bill of Materials tracking, COGS and inventory management all built in, it’s the complete solution to your pricing woes. Try Craftybase for free today.
Nicole Pascoe
Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.
A simple, step by step walkthrough of the IRS Form 1125-A.
We show you the easy (and surefire way!) to calculate your Cost of Goods Sold (COGS) accurately and with a minimum of fuss.
How to track and manage your raw material inventory to increase profits, become more organized and grow your business.
Thinking of setting up or purchasing a spreadsheet to get your handmade inventory under control? Before you do, you'll want to read this.
As a maker, one of the first things to realise is that you are not just a retailer of your goods - you are also a manufacturer of them. Why does this matter? Well for starters, it changes everything about the way you need to report your end of year revenue and expenses to the IRS.
We discuss the advantages and disadvantages of each inventory valuation method, showing you the best one to use for your manufacturing business situation.